Workers' Comp and Unemployment Insurance: What You Must Carry

Two Insurance Programs You Can't Ignore

Workers' compensation and unemployment insurance are two of the most misunderstood obligations small business owners face. They're not optional in most states, the penalties for non-compliance are severe, and getting them wrong can literally bankrupt your business.

Let's break each one down.

Workers' Compensation Insurance

What It Is

Workers' comp is insurance that covers employees who are injured or become ill because of their job. It pays for medical treatment, rehabilitation, and a portion of lost wages. In exchange, the employee generally gives up the right to sue you for the injury.

That last part is important. Workers' comp is often called the "grand bargain" -- employees get guaranteed benefits without having to prove fault, and employers get protection from lawsuits.

Who Needs It

Almost every state requires workers' comp coverage as soon as you have employees. The specific trigger varies:

• Most states: Required with 1 employee
• A few states (like Alabama): Required with 5+ employees
• Texas: Optional (but strongly recommended)

Even in states where it's technically optional, carrying workers' comp is almost always the smart move. Without it, you're personally liable for all medical costs and lost wages from a workplace injury -- and you can be sued for damages.

How to Get It

You have several options:

• Private insurance carriers: The most common route. Shop multiple quotes -- rates vary significantly between carriers
• State fund: Some states run their own workers' comp insurance programs
• Self-insurance: Available to large employers with proven financial stability. Not practical for small businesses

What It Costs

Workers' comp premiums are based on:

• Classification codes: Higher-risk jobs (construction, roofing) pay more than lower-risk jobs (office work)
• Payroll: Premiums are calculated as a rate per $100 of payroll
• Experience modification rate (EMR): Your claims history compared to similar businesses. Fewer claims = lower premiums
• State: Rates vary significantly by state

For a typical small contractor, expect to pay $5-15 per $100 of payroll. Office workers might be under $1 per $100. These numbers add up fast.

Managing Claims

When an injury occurs:

1. Get the employee medical attention immediately
2. Report the injury to your insurance carrier within the timeframe your state requires (usually 24-72 hours)
3. File the required state forms -- your carrier can guide you on this
4. Document everything: What happened, when, where, who witnessed it
5. Follow up on the employee's recovery and return-to-work status

Do NOT try to discourage employees from filing claims. That's illegal and will make everything worse.

Reducing Your Premiums

• Safety program: A documented workplace safety program can reduce your EMR and may qualify you for premium discounts
• Return-to-work program: Getting injured employees back to modified duty as quickly as medically appropriate reduces claim costs
• Accurate classification: Make sure your employees are correctly classified. An office manager coded as a roofer will cost you a fortune
• Annual payroll audit: Report accurate payroll numbers. Overestimates mean overpayment

Unemployment Insurance

What It Is

Unemployment insurance (UI) provides temporary income to workers who lose their jobs through no fault of their own. It's a federal-state partnership -- the federal government sets the framework, and each state administers its own program.

Your Obligations

As an employer, you pay into both the federal (FUTA) and state (SUTA) unemployment insurance systems:

Federal (FUTA):

• Tax rate: 6.0% on the first $7,000 of each employee's annual wages
• You receive a credit of up to 5.4% for state unemployment taxes paid, reducing the effective FUTA rate to 0.6%
• Filed annually on IRS Form 940

State (SUTA):

• Rates vary by state and by employer
• New employers typically pay a standard rate (often 2.7% but varies widely)
• Your rate adjusts over time based on your claims experience -- more former employees collecting unemployment = higher rate
• Wage base varies by state (from $7,000 to over $50,000)

When Employees File Claims

When a former employee files for unemployment, your state will notify you. You have the right to respond and contest the claim if you believe the employee is not eligible.

Employees are generally eligible for unemployment if they were:

• Laid off or had hours reduced
• Terminated for reasons other than gross misconduct
• Constructively discharged (forced to quit due to intolerable conditions)

Employees are generally ineligible if they:

• Quit voluntarily without good cause
• Were fired for documented gross misconduct (theft, violence, severe policy violations)
• Refused suitable work

Responding to Claims

Always respond to unemployment claims promptly and honestly. Include:

• The reason for separation
• Documentation supporting your position (warnings, termination letter, etc.)
• Dates of employment and final wages

Even if you believe the claim is valid, respond. Failure to respond is treated as agreement with the claimant's version of events.

Keeping Your Rate Down

Your state unemployment tax rate is directly tied to the number of successful claims filed by your former employees. To keep it low:

• Document everything: When you terminate for cause, your documentation is your defense against the claim
• Terminate for documented reasons: "It wasn't working out" isn't sufficient to deny a claim. Specific, documented performance issues are
• Consider severance agreements: In exchange for severance, you can include a clause where the employee agrees not to file for unemployment (enforceability varies by state)
• Don't fight legitimate claims: If you laid someone off, they deserve unemployment. Fighting legitimate claims wastes time and money

The Cost of Non-Compliance

Failing to carry required workers' comp or pay unemployment taxes can result in:

• Fines: Significant per-day penalties in most states
• Criminal charges: Some states make it a felony
• Stop-work orders: Your state can shut down your business
• Personal liability: You become personally responsible for all injury costs
• Loss of contracts: Many clients and general contractors require proof of workers' comp

Action Items

• [ ] Verify workers' comp requirements in your state
• [ ] Get workers' comp quotes from at least three carriers
• [ ] Register for state unemployment insurance
• [ ] Set up FUTA payment with the IRS
• [ ] Implement a workplace safety program
• [ ] Establish a process for handling workers' comp claims
• [ ] Create documentation practices for terminations